With the stock market being incredibly volatile at the present time and investors being fearful, seeking out companies with wide margins of safety could be a sound move. In other words, buying shares in companies that offer good value for money given their future outlooks, or that trade on appealing risk/reward ratios, could be a prudent means of taking advantage of a falling market over the medium-to-long term.
One stock that offers a wide margin of safety is online property listings company Zoopla (LSE: ZPLA). It was able to grow its bottom line by an impressive 29% in the last financial year, with demand for housing remaining strong as a result of an improving UK economy. This trend looks set to continue, since Zoopla is expected to increase its net profit by another 29% in the current financial year and despite this, it trades on a relatively low valuation.
For example, Zoopla has a price-to-earnings growth (PEG) ratio of only 0.7 and this indicates that its shares could continue their 30% rise of the last year. Undoubtedly, there’s the potential for an interest rate rise in the next year. But with rates likely to stay low over the coming years the UK property market is set to remain buoyant and this provides Zoopla with further opportunities for growth.
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Switched-on to ITV
Similarly, an improving UK economy has also boosted ITV’s (LSE: ITV) prospects. Its earnings have increased by 21% per annum during the last four years and in the current year they’re expected to rise by a further 10%. And while ITV’s shares have soared by 251% in the last five years they still trade on a PEG ratio of 1.6, which for a company with such a strong track record and further growth opportunities, seems to indicate a highly favourable risk/reward opportunity.
In addition, ITV is expected to increase its dividend by 22% this year and although this puts it on a yield of just 2.8%, it indicates that the broadcaster could become an appealing income play over the medium-to-long term. Additionally, it shows that ITV’s management team has confidence in its outlook, thereby potentially helping to improve investor sentiment moving forward.
Diversification risks
While BT (LSE: BT-A) could prove to be a sound long-term buy, its current strategy appears to be somewhat risky. Clearly, diversifying into mobile and pay-TV in recent years is an obvious move given that the company’s competitors are becoming quad play providers. However, the speed and scale at which BT is changing could cause investor sentiment to come under pressure, with the £12.5bn takeover of EE, £900m spent on Champions League football and other setup costs having the potential to make already nervous investors become less keen on BT’s strategy.
Furthermore, BT trades on a PEG ratio of 2.2 and this indicates that its risk/reward ratio isn’t particularly compelling. Therefore, buying the likes of ITV and Zoopla seems to be a preferable move.
